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What does FIRE even mean?

Eventually in your personal finance journey you get to a point where you are functionally on auto-pilot until you reach your “financial independence number” or FIRE Number.  Your FIRE Number is the investment balance at which, theoretically, you could withdraw from to maintain your current lifestyle for longer than you plan to remain alive without depleting the account.  That was a really morbid way of putting that… sorry.  It’s basically the amount of investments you need to be self-sustaining for the rest of your life.

The basic calculation is based on a study that concluded a 4% withdrawal rate has a very high likelihood of surviving at least a 30-year retirement timeline without running out of funds.  Essentially, if your annual expenses are lower than 4% of your starting balance, you should have a high probability of surviving retirement financially.  There are a lot of resources in the FIRE personal finance community discussing this concept at length. I’ll probably eventually write a dedicated article as well because the concept is so integral to those who want to retire early. For now, let’s simplify the situation by taking that study for granted and discussing the merits later.

Cool. How do I calculate my FIRE goal?

The magic of the FIRE Number calculation is that it isn’t based on your age, the number of years you plan to spend in retirement, the current stock market returns, or any other number based on external parameters over which you have little control over.  The number you need to focus on to retire early is your annual expense total, both now and what you expect it to be in retirement, which you have a lot more control over personally.

Your FIRE Number = [annual expenses] * 25

Where is the rest of the calculation?

That’s it. It’s hard to wrap your brain around how simple the calculation to retire early is.  I know it was hard for me to accept at first because I expected the equation to be more convoluted, and I expected the number to be much higher.  Your 401k provider is more than willing to calculate the amount of money it thinks you need to retire. When I would log into my accounts at Fidelity or The Hartford, they were always so helpful in suggesting seemingly insurmountable numbers. 

Every time I ran their simulations the number would be near $3,000,000 which seems like an impossibly large number for a person with my salary to accumulate in a lifetime.  Even by their reckoning, I might barely make it there before hitting a “normal” retirement age if the markets were favorable and I started contributing a lot more each paycheck.  Retiring early was a concept that never entered my mind after seeing those figures, and why would it?

Mind blown

It wasn’t until I eventually stumbled across the now infamous article by Mr. Money Mustache titled “The Shockingly Simple Math Behind Early Retirement” that I, like so many before me, completely changed how I think about trying to retire early.  Retiring early was no longer this mysterious, aspirational goal relegated to the wealthy, famous, or lucky but something that I could achieve.  I realized that not only is retiring early achievable, but closer than I ever thought possible and practically inevitable.

Right now, you’re probably as skeptical as I was then, and you should be. The idea that anyone should be able to retire early if they make a reasonable salary and keep their expenses under control is controversial somehow.  As a financial analyst and data scientist, I needed to validate this data myself, and I functionally did. (Eventually, I’ll provide an entire article later on how I did that.) Suffice it to say, after I ran thousands of simulations, I came to the same conclusion.  Numerous other websites and FIRE calculators backed it up as well.  I was sold.

Ok. So what happens when I get there?

So you’ve built this personal financial engine and are going full-speed toward your FIRE number. What happens when you get there? You will be financially independent and could retire early, but what does that even mean?  Do you actually quit your job and retire in the traditional sense? Do you reduce your hours? Can you finally switch careers to do something else you’ve always been passionate about? Will you start volunteering more?  What does it really mean to retire early?

The FIRE (financial independence, retire early) movement isn’t a race to traditional retirement. We aren’t rushing to stay home all day on the front porch and yell at kids to stay off our lawn.  (Well, you might be… I’m not judging.) The two-phase approach to life where you work non-stop until some magical finish line at retirement is not the goal.

It means having options

The FIRE movement is simply the most clear-cut, well-worn path to financial independence that results in the option to retire early.  That’s it.  It really should be the FIOR (financial independence, optional retirement) movement. The retirement part is optional.

What you do after crossing that magical FIRE threshold is an intensely personal decision– a decision that you need to start working out now.  You need to think about what you want to do when you are financially independent as soon as you can. Once you know that, you can slowly start transitioning into that lifestyle.  In my opinion, the ideal retirement shouldn’t need to be an abrupt shift in lifestyle in order for it to be considered a success.  Everyone needs something to do physically and mentally to stay young, something that provides them with personal fulfillment.

It means having freedom

Achieving FIRE or financial independence, if nothing else, gives us safety, security, and freedom.  We gain psychological and physical safety in knowing that, no matter what happens, we will be OK financially in most circumstances.  We gain the ability to try new things in life without worrying about failing at it, within reason.  We gain the security of being financially independent and no longer having to rely on a job for income or our own labor to survive. We gain the security to know we can weather most financial emergencies. 

Finally, we achieve the freedom to pursue whatever we want to if we choose to retire early, whatever form that takes. The freedom to take days off, to work fewer hours, to take any vacation we want without work-related repercussions or restrictions, to say “no” to work or push back on assignments we don’t agree with, to try a new career, to go part-time, or to do something we haven’t even considered yet.

The freedom to design our ideal life

Once you are financially independent you reduce a lot of stress in your life, increase security, and open a lot of possibilities that were previously unavailable.  It is your life, and this path to financial independence and the ability to retire early allows you to retake control over as much of it as possible.  Don’t hesitate– the best time to start your journey is yesterday.

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